A “disruptive force”: why Uncle Sam wants to save T-Mobile from AT&T

By now, everyone knows that the Federal Communications Commission has accepted the withdrawal of AT&T's $39 billion bid to buy T-Mobile. That doesn't mean that the fight is over. The companies promise that they'll continue to battle the Department of Justice's lawsuit against the deal in the United States District Court for the District of Columbia, or via "alternate means," as their press statement mysteriously explained.

But what's more significant, or "troubling" as AT&T chief attorney Jim Cicconi puts it, is that the Commission has released its staff report on the proposed merger. The telcos doubtless hoped to avoid that prospect via their strategic retreat. Reading through the 132-page regulatory feline suddenly released from Uncle Sam's bag, one can see why.

"By combining these two nationwide providers, the proposed transaction would result in an increase in both subscriber and spectrum concentration that is unprecedented in scale," the document warns. Not only would the merger "lead to a substantial lessening of competition," but it would also generate a "net loss of direct jobs."

The Commission took a look at the level of concentration that the merger would create in most Cellular Market Areas in the United States. "An unprecedented 99 or the 100 largest local wireless markets—every Top 100 CMA except Omaha, Nebraska, where T-Mobile does not operate—would exceed the level at which the Commission becomes concerned about anticompetitive effects," the survey concludes.

The staff paper is quite a read, despite all the redacted sections. What stands out the most, however, is the huge contrast between AT&T's assessment of T-Mobile, and the FCC's. As we reported seven months ago, AT&T launched its merger proposal with a total pan of T-Mobile's prospects:

"T-Mobile is not an important factor in AT&T's competitive decision-making.

"As a standalone company, however, T-Mobile USA would continue to face substantial commercial and spectrum-related challenges. It confronts increased competition from industry mavericks such as MetroPCS, Leap, and others; its percentage of US subscribers has been falling for nearly two years; and it has no clear path to LTE.

"T-Mobile USA, in contrast to others, does not have a differentiated network position. T-Mobile USA has admitted that it suffered from its late transition to a 3G network, and unlike Sprint, which first promoted a 4G network, T-Mobile USA's HSPA+ launch appears to have been lost among other carriers' 4G messaging.

"AT&T does not believe that T-Mobile USA has a particularly compelling portfolio of smartphone offerings as compared to AT&T, Verizon, and Sprint."

But the FCC couldn't see T-Mobile in more starkly different terms. The agency's big-picture scenario of the wireless market views the telco as an indispensable leader in low cost mobile services, and even a potential player in the wholesale broadband market.

For the government, this fourth-place wireless carrier is one of the good guys.

Loss of a "Disruptive Force"

T-Mobile is well known for providing very low cost wireless services, the FCC notes. A company with a "history of disruptive competitive conduct," the report describes the firm. "Although T-Mobile faces challenges as the industry develops and responds to the increasing data demands of consumers, the record does not support the bleak short-term outlook for T-Mobile that AT&T has portrayed in its submissions."

The FCC survey cites a wide variety of T-Mobile innovations, among them T-Mobile's leadership in providing WiFi hot spot services to consumers, "flex pay" plans in which consumers can defer upfront deposits, and "family allowances" that allow parents to remotely manage their children's lines.

And T-Mobile has even discussed wholesale access deals with greater New York area cable TV provider Cablevision. "Of the four national providers, AT&T and Verizon Wireless were not interested in selling wholesale access to Cablevision," FCC staff note, "most likely because Cablevision's new 'quad-play' bundle would have made Cablevision a stronger competitor to them, especially where they offer landline service."

Keep in mind that T-Mobile also offers the only GSM-based wholesale access alternative to AT&T, the assessment adds. "The record establishes that T-Mobile plays an important role in providing wholesale services, including as a competitive constraint in wholesale markets."

The government even sees T-Mobile as a significant player in the enterprise computing services market. "The record suggests that the proposed transaction between AT&T and T-Mobile is likely to lead to some enterprise and government buyers to pay more for mobile wireless services than they would absent the proposed transaction," the FCC warns.

Bottom line: AT&T's acquisition of T-Mobile would result in the elimination of its products (save for legacy subscribers), thus eliminating a competitive alternative for not only its extant customers, but the subscribers to rival providers like Verizon and Sprint. "In consequence, AT&T would find it profitable to increase price post merger, even though the same price increase would not have been profitable pre-merger."

And this incentive would also extend to Verizon and Sprint, given data that indicates that customers for these companies view T-Mobile products as their second choice. Even extant T-Mobile customers would be harmed by their inability to change among T-Mobile plans, forcing them to opt for more expensive alternatives, the Commission insists.

Scale and scope

Beyond this, the FCC rejects AT&T's claims that smaller regional providers could fill in the competition gap created by the merger. MetroPCS has deployed LTE in various cities, but has spread its spectrum out to the limit and can't match the speeds of the bigger carriers, the Commission thinks. MetroPCS, Leap, and U.S. Cellular possess much less spectrum than even T-Mobile. In the top 100 markets, T-Mobile averages at around 54 megahertz of spectrum, compared to 11, 11, and 4 respectively for the other three.

Ditto for regional providers like Cellular, C Spire, and Cincinnati Bell. "They also lack the scale and scope of T-Mobile, have difficulties in obtaining the newest handsets that help them compete for subscribers, and must rely extensively on roaming to offer nationwide services."

As for the prospects that these carriers could gradually expand their networks to become more competitive in light of the merger, the FCC scoffs, and notes that the huge telco says it needs T-Mobile licenses to build out its own:

AT&T claims it cannot now build enough additional sites and obtain sufficient additional spectrum in a few localities to expand an existing and successful business. Yet AT&T simultaneously argues that the smaller providers would solve any competitive problem by installing entirely new networks over most of the country, a task that would require substantially more cell construction and integration than AT&T's claimed requirements absent the transaction.

In conclusion, Commission staff finds that the Applicants "have failed to carry their burden of proving that the proposed transaction, on balance, will serve the public interest."

But the report says much more than that. It implicitly argues that T-Mobile, standing alone, represents a public interest pillar when it comes to providing affordable wholesale and retail wireless broadband. Consumers would lose a "disruptive force" if AT&T acquired T-Mobile. What the staff paper doesn't explain is how the carrier will continue performing that role if, as seems likely, this merger doesn't go through.

Matthew Lasar / Matt writes for Ars Technica about media/technology history, intellectual property, the FCC, or the Internet in general. He teaches United States history and politics at the University of California at Santa Cruz.